Sunday, 12 April 2015

Back when the markets were going hot in 2006 - 2007, just before the Lehman Brothers and Bear Stearns collapse took centre stage, the common water cooler topic was whether you managed to get allotments for shares in the latest IPO on the SGX. It seemed like the gravy train was running full speed ahead on wards to nirvana for retail investors. Not a bad move isn't it, getting some allotments and then selling onto the market, after all in a red hot market the only way is up up and away. It certainly was, till the music stopped and most investors found themselves without the proverbial chair.

Maybe if you had a better understanding of the IPO process, you probably would have stayed clear of the entire she-bang, so perhaps I can provide you with some insight of what an IPO process is all about, after working in investment banking for a good number of years. Maybe you would then have a better understanding of whether subscribing to allotments in the future would make sense.

Rationale for an IPO

The IPO exists as a method for either one or a combination or two things. Firstly, to raise new equity for the incumbent shareholder - typically the incumbent tries to tap the equity capital markets for US$[ ]m in exchange for a [ ]% of his company through the issuance of new shares, called a primary issuance. The enlarged company would then be worth US$[ ]m plus the additional US$[ ]m raised through the primary issuance.

Secondly, to raise proceeds for the incumbent shareholder - typically the incumbent tries to sell down a portion of his shareholding in his company through the equity capital markets, called a secondary issuance. The incumbent sells [ ]% of his company through the exchange of his existing shares for cash.There is no enlargement of anything but the incumbent shareholders' wallet. Sometimes this is called cashing out (exiting) or raising liquidity for the incumbent investor.

Now... an IPO is most likely a combination of both a primary and secondary issuance, on the pretext of raising capital for expansion (growth story anyone?) and providing the current shareholders with some liquidity as well. There might be many reasons for an IPO, from government privatization exercises to a form of exit for big boys (private equity investors), to a more genuine form of capital raising for expansion purposes by normal businesses.

Do think about it in more detail though, equity is the most costly form of investment as opposed to debt, so if you are raising capital for expansion through an equity issuance such as an IPO, it probably means that you are tapped out on your leverage and your capital structure really needs some equity. Common sense would dictate that is hardly a good sign... but then again common sense is not really common is it?

The Investment Banks and your interest do not go hand in hand

The sole job of the investment banks underwriting the IPO is to maximize value for their clients through selling the share issuance. A small technical point is that these days, banks seldom fully underwrite (meaning the banks take the entire risk of the IPO on their books and then tries to sell down in the public market later) IPOs, they do them on a best efforts basis.

The key word is "selling". And when you sell shit, you want to maximize value for what you get, so there is nil chance of something being fairly valued, or even under-valued. Nil. Donut. Kosong. And that is totally aligned with the investment banker's thoughts, as he wants to maximize deal size in order to generate more fees. Typically these guys are paid 2 - 4% of the total proceeds brought in.

Ah yes, one small caveat is that if you want recurring customers in the form of institutional investors, you might price down your share issuance a little to provide some "perceived value" so that there is some money left on the table and every one gets rich. But that to me, is pretty much gambling. From a retail investor's perspective, you are betting on the next dude in line bidding your price up as you unload.

You surely don't get anything at a discount to value, because the sole job of the investment banks are to maximize price for their clients. So if you are thinking of "investing" the next IPO, maybe you should just go play blackjack at MBS, might be a more exciting way of "investing" since you are gambling anyway :) Huat ah!

Saturday, 11 April 2015

Spent pretty much the last two weeks tidying up my life and gosh I haven't felt so at peace with myself in awhile.

On the physical side of things, I've cut out the usual weekend alcohol after falling ill this week and my mind is starting to feel more lucid and aware instead of the post-week numbness that it usually entertains as a result of a combination of draggy crap it's been saddled through work together with pints of Guinness or drams of whiskey. Have also cleared up the room and literally thrown out bags of trash, cleared out magazines, papers, articles, irrelevant letters from before, and the entire barrage of gifts that ex-girlfriends have sent my way. Somehow managed to put myself through a hard kettlebell workout despite being ill, and suddenly I'm beginning to feel more alive.

On the softer side of things, I've decided to do a massive clear-out of "friends" on Facebook, the culmination of the last 10 years of acquaintances that I've crossed paths with. Reduced the "Friends" list by c. 70% and it certainly feels pretty good to have some form of control over that to reduce the amount of junk and clutter that you'll have to deal with on social media. I went with the rationale of if I ever saw you on the street and if I didn't have the intention to at least stop and say hi and ask about you for at least a couple of minutes, like a friend would show some concern, I don't think we'll be considered friends. Key word there is "intention". Most people would advise that one should attempt to expand their network and you'll never know when that would be good for your career.

My thinking on that is to fuck that shit, maybe we should start talking about what it means to have a career instead. Career networking is such as bullshit thing and linking up with potential acquaintances just so they might be of some help in the future smells like such a careerism idea that it makes me gag. I believe in making friends with folks who have similar interests, and if you're interested for career reasons and not because of who I am, what I like and the areas my interests lie in, then yeah I don't think we should be friends. But wait a min, those career networking folks have similar interests - careerism. Oops...

I guess I like to think of myself as a lone wolf moving through the pine forest in search of nirvana, and sometimes to meet with a pack of like-minded wolves once in a while to have some fun and to bond over some prey. Okay, going on an off tangential spiel now, so I'll end here.

I've also started meditating a little. Check out this app called "Stop, Breathe, Think". It's pretty helpful for beginners and is a good platform to get started on.

Boy I feel like a chapter of my life has now closed for a good and a new one is just beginning. Perhaps there is some veracity to the saying "Tomorrow is the first day of the rest of your life". I feel like an animal whose cage doors have just opened and I'm raring to go.

Sunday, 5 April 2015

If I could highlight one thing (I hope it's not the only thing) that my parents did right for me when I was growing up as a kid, it would be their belief that their children should have unconditional access to reading materials and literature.

We would had to earn our way through a mix of savings from pocket money to achieving a certain set of grades in order to purchase luxury items such as a walkman, mp3 player, etc. but we were never denied the books we coveted. Unfortunately, I was more of an active than smart kid who preferred to get my hands dirty at the local playground rather than being holed up somewhere reading a book, thus comparatively to my siblings, I didn't take much advantage of this offer until I started to develop my reading habit in secondary school.

I remember being recommended James Patterson by a kind auntie from Sunny Bookshop in Far East Plaza (wonder if that place is still around) and I started reading about Alex Cross even before it was turned into a movie. Trust me, the books are way better than the movies. I began to realise how great books for an imaginative mind. The authors did well to transport me to another realm, and there were many a good time I had with these fictional characters and plots.

As I moved up to junior college, I started to explore the non-fictional genre and discovered the interesting realm of self-help, personal finance, investments and autobiographies. I would say I've been through quite a thick stack of self-help books, but I find that the one which really stood out to me, with its time tested principles, is The 7 Habits of Highly Effective People" by Stephen Covey. We were put through a course on that back in school and I would say that was my first introduction to personal development books. To be honest, despite having the opportunity to read that once through in secondary school, I only did really catch on with the principles in University, having messed around in my secondary school and junior college days.

And I guess that's the beauty of books. They provide different perspectives at different times of your life when you re-read them. Especially the books on personal development and investments, such as "From Darwin to Munger" by Peter Bevelin - that book is one I try to go through briefly every 9 months or so. Or those books on philosophy such as "This Ugly Civilization", "How I Found Freedom in an Unfree World" or "The Selfish Gene" - they do provide interesting perspectives you probably would not be able to glean if you went about on your merry way through life without every adopting reading as a priority activity. As you can see, I'm a firm believer in investing in yourself through reading. A mind once expanded never goes back to its original shape and size.

I have to say that the best thing about this decade is the development of technology to accommodate active readers. Prior to the invention of Amazon's Kindle, my house was pretty much stuffed up with hordes of books I had to kinda think twice before I bought anymore. Well it still is filled up with books now, but I haven't had to think twice about storing more books (electronic copies), no thanks to this nifty device. Mind you, my Kindle was one of the earlier versions of the Kindle Touch, and I purchased in in 2011. To date, that has been my best "luxury" purchase over the last four years, thanks for the sheer pleasure and adventures I had through it.

These days I try to put in some reading on the train trips to and fro from the office, which can take up to an hour each day. Most days I do non-fiction and some days I'll load up some trashy novels to ease off the knowledge expansion project. ha ha! How about you dear reader? If you're reading this piece right now, chances are you'll like reading too. What are some of the best books you've come across that have impacted your lives? And how much heed do you pay to reading?